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The bounce in treasuries is corrective


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The bearish scenario for treasury bonds that wedescribed in September andagain in October appears to be on track. Today's post shows some upward targets that nimble traders might play for, as well as areas where the next strong downward move might begin.

Longtime readers will remember that we followed treasuries through their climb up a multi-year channel and then watched price break downward, as expected, out of the channel. Looking farther back, our main scenario counts the entirety of the downward move from the 2016 high to the late-2018 low as the first wave of a larger downward pattern.

Here we use the iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT) to show our main bearish scenario. When we reviewed the scenario in September, TLT and bond futures were nearing the end of the sideways consolidation you can see on the chart below, labeled as small wave 'iv' of (v) of [i]. Shortly after that post, price moved downward to complete small wave 'v' as expected.

With the completion of wave [i], TLT and bonds now appear to be in the midst of a wave [ii] bounce. For traders, there are several considerations here.

The wave [ii] bounce might take the form of a relatively simple (a)-(b)-(c) pattern as shown on the TLT chart. An alternate scenario, still bearish, would have wave [ii] extend longer in time and develop a more complex pattern. We somewhat favor a simple, quick resolution for several reasons.

Even so, the resistance areas marked on the TLT chart at 127.74 and 131.71 should be relevant during the next several weeks regardless of whether wave [ii] remains simple or becomes more complex. Nimble traders might still play for those as near-term targets.

The same resistance levels are candidates areas where a strong downward wave [iii] to begin. With the next downward move, a decisive break of previous resistance, now support at 119.79 should serve as fairly good confirmation that wave [iii] has begun.

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